Recessions are hard on even the strongest of companies.
Dividend Champions are companies that have survived at least the past two recessions. I wanted to understand why companies that historically had been Dividend Champions lost that status and came to realize that this situation is quite rare.
Dividend Champions are companies that have raised their annual dividend each of the past 25 years. While this is not a guarantee that they will retain that status indefinitely, there is a degree of confidence that most will for a very long time.
I decided to find companies that fell off the list over the past dozen years and investigate the reasons why it happened. I was not concerned with companies that left their dividend unchanged but wanted to focus on those that cut it. As it turned out, actual dividend cuts for these companies are a rare occurrence.
76 Companies Dropped Since 2008
Since 1 January 2008, 76 companies have been removed from the Dividend Champions list. My interest lies with those that cut their dividend, a more severe decision than merely stopping its growth for a year. It is true that such a company no longer fits the description of a Dividend Champion, but my interest is along the lines of a company paying out less than they have over many years.
Of the 76 companies in the list, 14 had a year where they kept their dividend unchanged. Most of these companies resumed dividend increases and some of them are now Dividend Challengers.
23 of the companies on the list were acquired, so they were not included in the study.
The list contains 23 companies that are in the Financial Services or Real Estate sectors. We all know what happened in 2008 and it takes no stretch of the imagination to understand that the financial impact on these companies forced a dividend cut, so they are not included in this study. As with the group that left their dividend unchanged for a year, most resumed their dividend increases, and most of those are now Dividend Challengers.
Several others were in the group of 76 companies because the company split into parts or spun off a major component, thus forcing a dividend cut. As this situation is not a negative to the investor, for the purpose of this examination I chose not to include them.
The final list is of nine Dividend Champions. Understanding why these companies decided to cut their longstanding dividend should give us an idea of what to look for going into the future.
Calvin B. Taylor Bankshares Inc. – When Is a Dividend Cut Not a Dividend Cut?
When I was probably about six or seven years old I had a joke book. I can still remember the first joke in the book – When is a boy not a boy? Answer: When he’s abed. The word “abed” was not yet in my vocabulary so I did not understand the joke, but that did not stop me from telling it over and over.
But the question of when is a dividend cut, not a dividend cut, is legitimate and sent me down a rabbit hole while researching Calvin B. Taylor Bankshares Inc. They had been listed as the most recent (March 2020) of the Dividend Champions to have cut their dividend after 30 consecutive years of growth.
If you have never heard of the company then you are certainly in the majority. By far the smallest within the final group, they are a holding company offering banking products, which include deposit services, checking, savings, online banking, mobile banking, and loans to corporate and individual clients.
They currently have a market capitalization of about $80 million, which is small to the extent that the stock is only available through the OTC Markets Group, previously known as the Pink Sheets. This is an exchange where one does not have to file with the SEC to be listed (although most do), and is primarily for very small and thinly traded companies.
An initial examination showed me that their dividend had dropped from $0.31 to $0.26 but their financials gave me no clues as to why the decision had been made. Indeed, there was little information about this small company to the point that I had difficulty even finding their website.
I had a chance to speak with Dean Lewis, Chief Financial Officer of the bank and he explained to me that they had not cut their dividend. In years past they had distributed yearly dividends but as a company with a very small trading volume, it had become a problem. The price would rise in anticipation of the dividend and fall following the distribution, a scheme commonly used by those employing a dividend capture strategy.
They switched to quarterly dividends to ameliorate this situation and in 2019 offered three $0.25 dividends, followed by a $0.31 dividend at the end of the year. This blueprint is the expectation for 2020, which is why the $0.26 dividend appears as a cut. The plan is for three $0.26 quarterly dividends, followed by a larger final dividend to make the annual dividend larger than the previous year, thus preserving annual dividend growth.
It depends upon how one decides to define exactly what constitutes a Dividend Champion and what does not. In this particular case, as the dividend cut will probably not result in an annual dividend cut, I am keeping the company on my list of Dividend Champions, at least until the final dividend of the year.
Diebold Nixdorf Inc. – Incremental Make-Believe
Each year I ask for participation from visitors to the website to determine the dividend companies where people either participate in the dividend reinvestment programs or purchases. When I look at the listing created in 2000 I see that Diebold Nixdorf (Diebold at the time) was one of the more popular companies. I remember it being talked about quite often on The Motley Fool message boards in glowing terms.
Diebold Nixdorf (DBD) is engaged in providing software and hardware services for financial and retail industries. The company is our first study of those that seemingly begrudgingly increase their dividend. In 2011 they offered a dividend of $0.28 per share. Since 2008 they had increased their dividend by one cent per year, a dividend growth rate of a little over 1%. In 2012 they moved it up one-half cent to $0.285. 2013 saw a dividend increase of one-quarter cent, to $0.2875, where it remained for another three years before being slashed to $0.10, where it remains to this day.
It is not as if one could not have seen this coming. Dividend growth is one of the elements that we look at when considering a company, and when dividends are increased by fractions of a cent then this action appears as perfunctory – like a child cleaning their room, they do the bare minimum. And like when the mother looks under the bed to find all of the toys hastily stashed, a make-believe dividend increase will eventually have a time of reckoning.
With Diebold having lost about 90% of its value over the past five years and negative earnings, the $0.10 will could eventually go away.
Pitney Bowes Inc. – Another Incremental Case
Pitney Bowes (PBI) is a global technology company that offers products to assist consumers in marketing to their customers. At least since 2000, Pitney Bowes Inc. has been another case of a company offering a very small dividend increase. The quarterly dividends in 2000 were $0.285, which were moved up to $0.29 in 2001, about a 1% increase (though fortunate shareholders were treated to a one-time special dividend of $0.972 that year), and the half-cent increments continued each year until 2006. 2008 saw a two-cent increase in dividend but 2010 returned to the half-cent increases.
In January 2013 Pitney Bowes increased its dividend to $0.375 per share, representing a 13% yield. It is difficult to maintain a dividend yield in this stratospheric area and the following quarter it was cut in half, where it remained until 2019 when it was cut to $0.05.
Pitney Bowes had seen a stock high of $63.93 in April 1999. It dropped significantly then rebounded to $48 in April 2007, whereupon it lost 95% of its value. Those looking for high dividends will note the current 8.7% yield but with the stock hovering in the low $2 range the risk of the dividend coming to an end is real.
This is another case where one could have seen the dividend cut from a mile away. Falling stock prices can yield unsustainable dividend yields that must somehow be dealt with. The company needs to choose between using their earnings to fix what is wrong with the company or please their shareholders with dividends. When the payout ratio reaches a point where it inhibits the company’s ability to grow then the responsible move is probably to divert the cash to rescuing the company.
CenturyLink Inc. – Frozen in Time
It seems forever ago when I was a CenturyLink (CTL) shareholder. That a couple of decades ago when stocks had massive swings regularly and CenturyLink was no exception. CenturyLink offers businesses a full menu of communications services, providing colocation and data center services, data transportation, and end-user phone and Internet service. During the beginnings of the Internet, the company’s price rose to $47.37 in December 1999 then fell to $24.50 in April 2000. Its ups and downs were like other technology companies of the time, crazily dancing to seemingly random points.
I sound like a broken record when I mention their dividend growth measured in terms of portions of a cent. CenturyLink’s 2000 quarterly dividend was $0.0475 and was raised by one-quarter of one cent in 2001 to $0.05. This minuscule dividend rise continued into 2008 when the dividend was increased by more than a factor of ten.
CenturyLink had decided to change from a low dividend company to one that distributed essentially all of its free cash flow. The June 2008 dividend of $0.0675 was increased to $0.70 in September, a huge move. This dividend remained constant throughout 2009, rising to $0.725 in 2010, where it remained until 2013, when it cut its dividend by 25% after announcing a revised capital allocation strategy.
From 2008 to 2013 CenturyLink had increased its debt load 600%, as its revenue growth could only be attained through acquisitions. CenturyLink had acquired Qwest, which doubled its size. They also issued a large number of shares at the time of the acquisition, placing a burden on the dividend’s affordability. Although there was enough free cash flow to pay the dividend that did not leave much room for an increase.
The market punished CenturyLink by dropping the share price by over 20%, but as the dividend had been stuck in place for three years, this should not have been a shock. Declining revenues as customers started to shift toward cellular phones brought cash flow under pressure. Debt and the dividend were two of the biggest cash expenses, so it made sense to slash one to pay the other.
Supervalu Inc. – Stuck in the Middle
One may wish to blame the recession for Supervalu’s problems, and while that is partially true, competition and its inability to react is more on target. Whole Foods was at one end of the food spectrum with its dominance in the organic and health-food segment. The other end showed Wal-Mart offering the same products at discounted prices. Supervalu was stuck between the two extremes.
These two ends placed pressure on traditional grocery store chains and some reacted better than others. Kroger, for example, boosted the quality of their store brands through self-owned manufacturing facilities, offering savings and speed to the market. Supervalu did not recognize this opportunity and was crushed as unemployed and underemployed looked elsewhere to save money.
After 35 years of dividend increases, in 2009 Supervalu announced that they were cutting their dividend in half, and the dividend was suspended three years later. By then the yield had risen to 7.6%, compared to the 3.6% of Safeway and 2% of Kroger. With the announcement, the stock fell 40% and the company is now owned by United Natural Foods Inc.
Seeing the dividend cut coming may have been possible, as the company had shown six consecutive quarters of declining same-store sales. As the economy recovered, the low-margin grocery sector continued with its problems. Supervalu had acquired Albertson’s and struggled with the resultant debt. The burden of the dividend got to the point where it finally became untenable.
Avery Dennison – Down but Not Out
Avery Dennison Corp. (AVY) manufactures pressure-sensitive materials, merchandise tags, and labels. They are another case of seeing dividend growth come to a crawl before their dividend cut. The 2000 quarterly dividend was $0.27, which was increased by $0.03 the following two years, then $0.01 over the next five years before being sliced in half in 2009 when the yield had risen to 8.5%.
The economic downturn and financial crisis of 2008 had taken its toll on the company and it had been unable to cover its dividend payment over the two quarters before the cut. The cut was something that one could have anticipated by noting the slowing of dividend growth over time and realizing the payout ratio was unsustainable.
In this case, the dividend cut was not the end of the world for Avery Dennison. Since cutting the dividend to $0.20, the company increased its dividend in 2011 and has continued doing this each year (current dividend is $0.58), so they are now a Dividend Challenger.
The Dividend Champions spreadsheet shows a five–year dividend growth rate of 11%, which is healthy. The stock price tripled over the past five years before being knocked down by the current recession. With a current payout ratio of 29.7, the company appears poised to eventually move from the Dividend Challenger to Dividend Contender ranks.
Masco Corp. – Inch by Inch
Masco (MAS) is a manufacturer, distributor, and installer of home improvement and building products. When the housing market fell apart so did the company’s 50-year history of growing their dividend. With a dividend yield over 10% and saddled with debt the balance sheet was unable to support its payments.
Masco’s 2007 quarterly dividend of $0.22, which had been increasing by $0.02 per year over the previous four years, slowed to a one-cent increase representing a 1% dividend growth, then half a cent in 2009 before cutting its dividend by two-thirds. Earlier in the year, they had projected that the company would, at best, break-even for the year as sales from new home construction and falling house prices hurt the demand for their product.
Again, we see a case where a company had been increasing its dividend in the normal 5% range slow down dividend growth until problems forced the cut. In this case, their cut to $0.075 remained until 2014 when they began increasing it again.
Today Masco is only offering a $0.135 dividend, which translates to a 1.35% yield, but the payout ratio of 15% makes that easily sustainable. Like Avery, Masco is a Dividend Challenger.
General Electric Co. – The Giant Falls
After 32 years of dividend growth, General Electric (GE) succumbed to problems caused by the recession, in large part due to GE Capital, their capital finance division. The company wanted to maintain its Triple-A credit rating, which allowed them to borrow at cheaper rates but came with the requirement of a significant amount of cash on hand. With a payout ratio approaching 90%, the dividend yield of nearly 12% offered no way for GE to increase its dividend, so it was slashed it from $0.298 to $0.096.
I could have included General Electric in the category of financial institutions affected during the Great Recession but wished to take note that even the largest of companies can fall. Although the company increased its dividend in 2010 and continued with increases until 2015, followed by small increases in 2016 and 2017 they sliced it in half in 2017, and finally all but ended it in 2019 when they reduced it to a token one cent.
Pfizer Inc. – Back From the (Almost) Dead
Pfizer (PFE) is one of the world’s largest pharmaceutical firms, with annual sales over $50 billion. I contributed to their dividend reinvestment program from 1997 through 2008, at which time my confidence in the company waned. The world’s largest maker of drugs had been doing well, but on the horizon was the fact that their blockbuster drug Lipitor would soon be opened to the generics.
As the eroding stock price and Pfizer’s payout ratio of 108% in 2008 gave me pause, I sold with the realization that a dividend cut might be in the future. They halved their dividend in 2009 to afford the purchase of Wyeth in an attempt to diversify into vaccines and injectable biologic medicines. Thus ended 41 years of dividend growth.
Since that time Pfizer has continued to grow its dividend, returning to the $0.32 in 2017 it had been before the cut. Now with ten consecutive years of dividend growth, Pfizer is a Dividend Challenger, showing a 6.1% dividend growth over that time.
Looking at the Future
The financial crisis of 2008 was due to a failure in the financial system that had manipulated the real estate sector. All companies with exposure to these groups, as well as others that happened to be in the same sectors, were adversely affected. There is no protection in this situation as even very large companies like Bank of America and General Electric were forced to stop growing their dividend.
Recessions that affect a particular sector place companies within that group in jeopardy of having to survive through dividend cuts. Freeing up cash allows flexibility to solve problem issues, and the immediacy of survival is paramount.
Of the eight companies examined that cut their dividends, five had previously been showing anemic dividend growth. This is a red flag that the company is saddled with the distribution of its dividend and if the payout ratio exceeds 100% then it could signal an impending cut.
This knowledge can give us a clue as to what we might expect with current Dividend Champions. Using the Dividend Champions spreadsheet to sort them by a five-year dividend growth rate we see that 14 companies are flagged as not having had a dividend increase for more than one year.
| Company | Ticker | Sector | Industry | No. Yrs | Div. Yield | DGR 5-yr | EPS% Payout |
|---|---|---|---|---|---|---|---|
| Mercury General Corp. | MCY | Financials | Insurance | 33 | 6.19% | 0.4 | 43.6 |
| Pentair Ltd. | PNR | Industrials | Machinery | 44 | 2.55% | 0.6 | 35.7 |
| Northwest Natural Gas | NWN | Utilities | Gas Utilities | 64 | 3.09% | 0.6 | 86 |
| First Financial Corp. | THFF | Financials | Banks | 31 | 3.08% | 1.2 | 27.4 |
| United Bankshares Inc. | UBSI | Financials | Banks | 45 | 6.07% | 1.2 | 54.9 |
| Westamerica Bancorp | WABC | Financials | Banks | 28 | 2.79% | 1.4 | 55 |
| People’s United Financial | PBCT | Financials | Banks | 27 | 6.43% | 1.5 | 55.9 |
| Universal Health Realty Trust | UHT | Real Estate | REITs | 34 | 2.72% | 1.5 | 198.6 |
| Nucor Corp. | NUE | Materials | Metals & Mining | 47 | 4.47% | 1.6 | 38.9 |
| Helmerich & Payne Inc. | HP | Energy | EnergyEquipment &Services | 47 | 18.15% | 1.6 | n/a |
| Urstadt Biddle Properties | UBA | Real Estate | REITs | 26 | 7.94% | 1.7 | 203.6 |
| Brady Corp. | BRC | Industrials | CommercialServices &Supplies | 34 | 1.93% | 1.7 | 33 |
| Thomson Reuters Corp. | TRI | Financials | Capital Markets | 27 | 2.24% | 1.8 | 205.4 |
| Old Republic International | ORI | Financials | Insurance | 39 | 5.51% | 1.8 | 23.9 |
The dividend yield and payout ratios that jump out as a problem are highlighted in red.
At one time I owned Helmerich & Payne (HP) but sold when I felt that their dividend could not be sustained. Their current dividend yield over 18% is a problem as is the case with companies associated with the falling price of oil. The EPS Payout is listed as “n/a” because earnings were most recently negative but based on trailing 12 months of earnings it comes to 162%. This means that they will need to borrow money or sell assets to pay the dividend. This is a situation ripe for a dividend cut.
Other red flags are found in the payout ratios of Universal Health Realty Trust, Urstadt Biddle Properties, and Thomson Reuters Corp. Ratios over 100 are problematic but can be dealt with. However, combined with a slowing dividend growth rate we have seen is a signal that a dividend cut may be in its near future.
Universal Health Realty Trust (UHT) has historically upped its dividend by only half a cent since 2000. This has translated to a 1.3% growth rate over the past ten years.
From 2000 through 2010 Urstadt Biddle Properties also offered half-cent increases, switching to quarter-cent increases for five years before returning to one-half cent. Dividend growth over the past 10 years has been 1.4%.
Thomson Reuters increased their dividend by portions of a cent from 2002 to 2008, when they switched mostly to a full cent for five years before returning to a portion of a cent for six more years. The 2.5% dividend growth rate over the past 10 years has slowed to 1.8% over the past five years.
Slowing dividend growth combined with a payout ratio over 100% does not give the dividend growth investor confidence that dividends will not be cut in the future. These are signs that a dividend cut may be in the future and should be taken into consideration by the investor
From 2008 through 2017, the average number of companies employing dividend cuts for any reason is 3.3%. Remove the 2008-2009 timeframe and that becomes 1.7%. To put this into context, there is a 1.8% chance that one of these companies will be acquired.
As a testament to its rarity, the most recent Dividend Champion to be removed from the list not due to being acquired or the spinoff of a section of the company, was Pitney Bowes in April 2013. So it has been seven years since this group has presented an investor with a deleterious dividend cut.
As is known by everyone, there are no guarantees for the future. Of the 140 current Dividend Champions, certainly, some will eventually cut their dividend. But selecting companies within this group that have consistent and meaningful dividend growth along with a reasonable payout ratio makes one as sure as possible that they will retain their dividend well into the future.
Should you hold or invest in an S&P 500 index fund?
The above examines companies that had been removed from the Dividend Champions list due to dividend cuts.
This section considers whether one should have continued to hold onto those companies, or sell them and place the money into an S&P 500 index fund.
Dividend Champions are companies that have increased their dividend for the past 25 years, Contenders for the past 10, and Challengers for the past five.
Companies are regularly removed from these lists for a variety of reasons.
United Community Financial was removed in February 2020 because it merged with First Defiance Financial Corp. Two River Bancorp was removed a month earlier because it had been acquired by OceanFirst Financial. KAR Auction Services spun off IAA in August 2019, which forced a lowering of its dividend. In January 2019, Dun & Bradstreet went private, so it was removed.
These are situations that are not necessarily negative to the investor. Acquired companies receive recompense that may be a combination of share price and dividends. Companies that spin-off divisions similarly offer share price and/or dividend compensation. Companies going private purchase the shares of the investor.
Dividend suspensions and cuts, however, go against the investor’s expectations and work to negatively affect one’s portfolio. Cuts severely impact the investor, and companies that did this were the focus of the previous two articles. The question posed here is whether or not the dividend cut of a Dividend Champion should automatically trigger the sale of the stock.
To answer this question I looked at seven companies from the previous list that had cut their dividend. I did not include Supervalu as it was acquired. The results are in the following table. I used the date of the actual cut as the reference because it was readily available, but the alert investor would have decided on the announcement date instead.
| Ticker | Company | Date of 1st Div Cut | Total Return | From the original $10,000.00 | Total Return |
|---|---|---|---|---|---|
| DBD | Diebold Nixdorf Inc. | 11/16/2016 | $1,594.85 | -$8,405.15 | -84.10% |
| PBI | Pitney Bowes Inc. | 5/28/2014 | $1,129.19 | -$8,870.81 | -88.70% |
| CTL | CenturyLink Inc. | 3/7/2013 | $5,252.15 | -$4,747.85 | -47.50% |
| AVY | Avery Dennison | 8/31/2009 | $44,560.73 | $34,560.73 | 345.60% |
| MAS | Masco Corp. | 4/7/2009 | $71,975.86 | $61,975.86 | 619.80% |
| GE | General Electric Co. | 6/18/2009 | $7,732.50 | -$2,267.50 | -22.70% |
| PFE | Pfizer Inc. | 5/6/2009 | $37,890.35 | $27,890.35 | 278.90% |
| Averages | $24,305.09 | $14,305.09 | 143.10% |
In this table, I assumed a $10,000 position in each company at the time of the initial dividend cut. I used the excellent Stock Total Return and Dividend Reinvestment Calculator to determine the total return from that date to the present. For instance, if one had a $10,000 position in Diebold Nixdorf on 11/16/2016 then today their position, considering dividend reinvestment, would be $1,594.85. This would represent a loss of 84.1%.
Had one held onto their position of Masco then the outlook would have been considerably brighter, seeing an awesome 619.8% total return. The results appear as a mixed bag, the majority offering negative results but averaging in the positive range.
Extending the question, I wondered how the results would have compared to selling the shares and placing the $10,000 into SPY, the S&P 500 ETF. I found the results in The S&P 500 Dividends Reinvested Price Calculator and placed them in the below table.
| Ticker | Company | Total Return | SPY | Total – SPY |
|---|---|---|---|---|
| DBD | Diebold Nixdorf Inc. | -84.10% | 31.70% | -115.80% |
| PBI | Pitney Bowes Inc. | -88.70% | 60.00% | -148.70% |
| CTL | CenturyLink Inc. | -47.50% | 105.90% | -153.40% |
| AVY | Avery Dennison | 345.60% | 227.90% | 117.70% |
| MAS | Masco Corp. | 619.80% | 308.30% | 311.50% |
| GE | General Electric Co. | -22.70% | 272.20% | -294.90% |
| PFE | Pfizer Inc. | 278.90% | 282.80% | -3.90% |
| Averages | 143.10% | 184.10% | -41.10% |
With 20-20 hindsight, holding onto Avery Dennison and Masco and selling the others would have been an advantageous choice. Of course, we do not have that luxury, so selling all Dividend Champions once an actual dividend cut had been made and using the $10,000 to purchase SPY would have yielded a better return.
With such a small sample it is difficult to find commonality, something that when the cut occurs tells us to sell or hold. With the ability to look into the future we would easily have sold DBD because they eventually ended their dividend. PBI, CTL, and GE cut their dividend a second time. AVY, MAS, and PFE continued increasing their dividends and have done so for the past 9, 6, and 10 years.
This is why I have spoken of gauging the importance the company has on its dividend. For some companies offering a dividend appears as a desultory act while others give it a high priority. In the table above, the big winners were the companies that chose (or perhaps, were able) to eventually follow the dividend cut with a resumption of dividend growth while the big losers continued to cut their dividend.
Perception of this sort at the time is too often skewed by emotion. It is probably best to stick with the recommendation in Stock Tips are Bunk to know why you buy so that you know when to sell. If dividends are a very important reason for the purchase of the stock, and the company cuts them, then perhaps it is time to sell and put your money in a better
